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  Manulife Investment Management – Disruptive tightening and China key risks Monetary policy—Global central banks are sounding more hawkish—U-turns from the Bank of England (BoE), policy adjustments from the European Central Bank (ECB), a Bank of Canada (BoC) that’s actively tapering, and a U.S. Federal Reserve (Fed) that’s set on winding down its asset purchase program. While our base-case expectation is that the market will be able to absorb these tightening measures if they’re implemented gradually, it’s still worth noting that: • Global liquidity is declining, which has historically been problematic for growth • If real interest rates climb too quickly, it can derail the equities market (as it traditionally has done), particularly as rates approach 0% • The current environment creates scope for policy miscommunication that could create volatility in global interest rates and currency markets The downside risks in the coming quarter are most concentrated in China, wher...

The latest macro data indicates that the Indian economy may be standing at an inflection point. Having survived a major accident in the form of Covid19 pandemic, the economy looks stable, having progressed well to reach closer to the pre Covid level of activity. Of course, for next few quarters the economy may still need to use the support of government spending, before the virtuous cycle of higher investment and consumption kick starts. Post pandemic, the challenges before the government are multifold; and so are the opportunities. A successful resolution of these challenges could trigger a virtuous cycle of growth and catapult the economy to the higher orbit. A failure may not be an option, as it could cause a disaster of unfathomable proportion. Besides, merely achieving a full ‘V’ recovery to the pre pandemic level of economic activity will be inadequate, since pre pandemic the economy was slowing for many years and was completely unable to generate adequate jobs for the burge...

The valuations of Indian equities, or the global equities in general, has become subject of intense debate, with participants analyzing the markets with personal biases and prejudices. A variety of models, methods and timeframes are being used to justify the current valuations as reasonable, or reject these as unsustainably high. Many analysts have preferred to ignore the aggregate valuations and adopted different yardsticks for various classes of businesses. Given that the benchmark Nifty has close to 38% weight of financial services, it may not be appropriate to give undue consideration to the aggregate PE ratio of the index for benchmarking the “market” valuation. Some analysts prefer to use global indices (e.g., MSCI India Index) to assess the valuations of Indian equities. Many new age businesses which are solely focused on revenue growth and may not be profitable in short to mid-term. For these businesses applying the conventional valuation methods might not be appropriate....

 The Indian equities performed decently in 2021. Investors would normally have nothing to complain about the returns on their equity portfolios. ·          The benchmark Nifty is up ~21% YTD2021. It is 6 th consecutive year of positive return on Nifty. Nifty has now returned positive return in 9 out of past 10years (2012-2021). ·          Nifty has averaged 15881 (based on daily closings) in 2021, which is 44% higher than the same average for 2020. Based on change in average, this is best performance since 47% gain in 2006; implying strong returns for SIP investors. ·          For long term buy and hold investors, five year rolling CAGR in 2021 is ~15.7%, which is best performance since 2013. Five year absolute Nifty return in 2021 is ~107%, also highest since 2013. ·          The market returns were fairly broad ba...

 In its latest policy statement, RBI has reiterated its unwavering commitment to growth, ignoring the concerns about it missing the inflation curve. There are not many precedence in past two decades when the RBI has shown such unwavering commitment to growth despite mounting inflation concerns and global tightening pressures. The decision of the Monetary Policy Committee of RBI to maintain status quo on policy rates and keep the policy stance “accommodative” despite mounting inflationary pressures has provided some relief to the financial markets. However, it has divided the experts on the mid-term economic impacts. The bankers have generally welcomed the RBI’s policy stance as credit and growth supportive. However, economists believe that this leniency on inflation may not end well. They believe that this profligacy of RBI will leave it much behind the curve and force it to make disruptive tightening in mid-term. There are some questions over the autonomy of MPC also. A smal...

 It was a sunny afternoon in winters of 1991. I was enjoying coffee at a famous public café in Connaught Place (New Delhi) with couple of my friends. All of us were waiting for our CA Final result, which was to be announced in couple of weeks. My friends were senior to me and were already working, having completed their articleship two years ago. We were discussing the economic changes that were getting unleashed in the country by the new regime that had assumed office a few months ago. The economic changes had not impacted me in any positive manner by then. INR devaluation had led to inflation spike disturbing our household budget. Some of my close relatives who were running micro and small industries (then called SSI) were deeply worried about sustainability of their business as they were now exposed to competition from larger businesses and imports. My cousins had their own set of worries. The implementation of Mandal Commission recommendation was reaffirmed. The competition t...

The media headlines are implying that the foreign investors have been incessantly dumping Indian equities; and this could be one of the primary reasons for currently ongoing correction in the equity prices. Though there is no evidence of any strong correlation between Nifty and foreign flows over medium to long term (3 months and beyond); these flows have been seen increasing the volatility in near term. In particular, if the correction in prices is sharper, the selling by foreign investors is highlighted prominently, adding to the nervousness of the non-institutional investors. It is therefore important to know the actual trend of foreign flows; and analyze whether the selling is part of any structural change in their view or just a trading tactics to enhance their return. The market participants, who track the daily foreign flows closely and get influenced by the provisional net flow data released by SEBI every evening, must note that— ·       ...

 India’s GDP grew 8.4% yoy in 2QFY22, ahead of most estimates. RBI had expected the GDP to grow 7.9% last quarter. This better than estimated growth is some relief at times when worries about worsening of Covid-19 conditions. The growth was largely driven by Agriculture (4.5%), services including construction (9.9%) and exports (19.6%). Manufacturing growth (5.5% yoy) was below estimates, dragging down the overall industry sector growth to 6.7% yoy. While all segment of services grew at a decent pace, public services and defence were the largest contributors, growing 17.4% yoy. Business sentiments are at multiyear high, but consumer sentiment is not improving. The household outlook on income is still below pre covid level. The government has done a good job in managing the fiscal conditions. Subject to the government completing the promised disinvestment, the FY22 fiscal picture may be much better than the budget estimates. The Covid management is performing very well, with...